Plan won't significantly drive up egg prices

CONTRARY to claims, an egg industry transition from conventional cage housing to enriched colony cage housing will not drive up egg prices to consumers, according to an analysis by Tom Earley.

In current currency, the transition will increase prices 1.5 cents/doz. over the 16-year conversion period and 6 cents/doz. -- a half-penny per egg -- once the conversion is completed in 2030, Earley found.

Earley, who is with Agralytica in Alexander, Va., based his analysis on a baseline scenario that does not include an industry-wide transition and on another scenario that does involve an industry-wide transition.

He conducted the analysis for the United Egg Producers (UEP), which represents the U.S. egg industry.

The transition would occur through implementation of an agreement between The Humane Society of the United States (HSUS) and UEP that the two organizations struck two years ago (Feedstuffs, July 11, 2011).

It would occur through legislation that would amend the Egg Products Inspection Act of 1970 to require egg producers to house their hens in enriched colonies by the end of 2029.

The legislation is expected to be introduced in Congress soon.

Colonies are cage housing systems but are considerably larger than conventional cages, allowing birds far more space than conventional cages and providing them with "enrichments" such as nests, perches and scratching pads so hens can express more natural behaviors.

The HSUS-UEP agreement also calls for a number of environmental, health, nutrition and other management practices.

The transition includes phase-in periods and would become fully implemented at the end of 2029.

The agreement does not apply to niche production systems such as cage-free, free-range and organic production.

However, the beef and pork industries -- and factions within the poultry industry -- are opposed to the legislation based on the belief that it would set a precedent for Congress to regulate housing practices for other livestock and poultry. Their opposition is so strong that one of their claims is that construction of and production in colonies would increase industry costs so much that consumer-level egg prices would increase significantly.

Earley's analysis found otherwise.

Costs, prices

Earley broke out his analysis into three categories: capital investment, production costs and consumer prices.

As for capital investment, he said the additional space provided for hens would mean that the existing number of hen houses would be insufficient to maintain a national flock of the size it is now.

Although many houses could be renovated, there would also be a need for "a great deal" of new construction, he said.

In talks with equipment companies and egg producers, Earley estimated that the cost for colonies would be $24 per bird in new construction and $20 in renovations plus $1 per bird for the appropriate enrichments.

He compared this with his baseline scenario in which most of the industry would replace worn-out conventional housing with new conventional housing.

He determined that the additional capital investment needed over the transition period to make the conversion would average $145 million more per year, i.e., capital needs would increase from $3.1 billion that would be invested in the baseline scenario to $5.7 billion in the transition -- an increase of $2.6 billion.

Earley noted that his calculations are based on 2012 dollars.

As for production costs, Earley said he looked at data from Europe, where colony systems are more evolved, and also from California, where some investment in colonies already has been made.

He said the data indicate that costs of production in colony systems are 12.5% higher than in conventional housing, which includes higher feed and labor costs. Accordingly, he determined that eggs produced in conventional housing would cost 72.7 cents/doz. to produce, while eggs in colony systems would cost 81.9 cents/doz. to produce -- three-quarters of a cent, or 12.7%, more per egg.

As for consumer prices, Earley noted that the agreement establishes a gradual transition from conventional housing to colony systems and also requires -- one year after enactment of the legislation -- eggs to be labeled as to their system of origin, i.e., eggs from hens in cages or enriched colonies or eggs from cage-free or free-range hens.

Accordingly, he said higher consumer prices will result over the transition period. Eggs from caged hens will be the cheapest and will remain the cheapest during the transition, reflecting what will be lower production costs, and eggs from colonies -- once egg producers start to build colonies -- will be a bit more expensive, reflecting higher production costs.

Cage-free and free-range eggs will continue to sell at premiums to the market.

Earley drew the conclusion that most of the impact of the 9.2-cent increase in production costs (from 72.7 cents to 81.9 cents/doz.) won't occur until well into the 2020s and will average about 1.0%, or 1.5 cents/doz. -- a quarter-cent per egg -- during the 16-year transition period.

By 2030, consumer prices will reflect the entire 9.2-cent increase, he said.

However, egg prices will also increase in the baseline scenario because, without a legislative mandate, it's expected that 34% of eggs still will be produced in enriched, higher-cost systems, Earley said. Therefore, he penciled consumer prices to be 6.1 cents/doz. higher in 2030 if the HSUS-UEP agreement is in place than if it isn't.

Earley's investment and other calculations are shown in the Tables.

Earley noted that customer and consumer demand tends to change over time, and baseline prices may actually be higher in 2030 than assumed in the analysis because demand may increase for higher-priced specialty eggs such as enriched, cage-free, natural or organic eggs.

Also, foodservice and retail customers could opt to expand margins on their egg sales by raising their egg prices, he said.

Accordingly, Earley said consumer prices could increase as much as or more than they would with the HSUS-UEP agreement in place.